Following a disappointing financial year in 2015, Bilfinger is undergoing extensive changes. The company is narrowing the focus of its business from three to two segments, concentrating activities that are currently spread around the globe on the home market of Europe and replacing its complex structure with a transparent and fast-moving organization. As a result, Bilfinger’s profitability will increase sustainably.
Clear focusing of the business
The two business segments Industrial and Building and Facility will operate independently within Bilfinger and will be given greater entre- preneurial freedom. With this independence, each segment will be able to develop its strengths in a more targeted manner together with a higher quality standard.
In the Industrial segment, Bilfinger is concentrating on markets in Central and Northern Europe. An improved sales strategy will help to further intensify cooperation with strategically important customers and to further expand the market position in this core region. Bilfinger will restructure Industrial’s low-margin operations. The segment will thus get back on a path to success and, in the medium term, once again be able to increase volume and earnings.
In the Building and Facility segment, Bilfinger will focus more strictly on real-estate services and consistently move forward with its successful growth path. The Group will expand its position as a strong real-estate services provider on the European market. Through organic growth and selective acquisitions, Bilfinger seeks to increase output volume with a continued good earnings margin in the Building and Facil- ity segment.
In addition, areas with an output volume of approximately €1 billion have been identified which in the future will no longer be part of the core business. For these activities, all strategic options will be reviewed without bias.
In the context of focusing on engineering and services, we sold our civil engineering business in 2015. At the beginning of the year, the
CORE MARKET EUROPE: BILFINGER FOCUSING ITS BUSINESS OPERATIONS
ON CLEARLY DEFINED INDUSTRIES, CUSTOMERS AND SERVICES
KEY POINTS OF MID-TERM CORPORATE DEVELOPMENT
Construction division was sold to Swiss construction services company Implenia; in mid-2015 we sold the Infrastructure division to Austrian construction company Porr.
Basis for future profitable growth
As a result of the decision to put the former Power business segment up for sale, Bilfinger will substantially reduce its business risks. The stronger positioning of power plant activities in the international major projects business, which is necessary due to the difficult situation on the German market, is not in line with the strategy and risk profile of Bilfinger as an engineering and services group.
In order to improve the operational performance in industrial ser- vices, we have launched a comprehensive program for the optimization of processes for service orders. Primary objectives include the stand- ardization and efficiency enhancement of procedures in workshops and logistics chains as well as in information technology and resource planning. Through a stronger key account management focused on the respective business activities, we intend to increase our sales with stra- tegically important customers and thus promote profitable growth. In addition, initiatives are currently being defined in order to take advan- tage of market trends that have been recognized and to tap into future profitable growth.
The optimization of administration within the Group is of particu- lar importance. The administrative structure will be adjusted to the business activities that are being focused on. The goal is to make the entire organization more efficient and to significantly reduce adminis-
trative expenses. We will therefore undertake significant investments in the standardization of the IT landscape and further expand the shared service activities as well as the shared use of administrative functions.
Extensive measures were also undertaken to improve cash conver- sion at Bilfinger. These include the use of a task force, the Group-wide introduction of best practice processes, intensive training programs and monthly monitoring. The objective is to accelerate internal billing pro- cesses and to optimize receivables management.
Key points of mid-term corporate development
In 2015, Bilfinger laid the groundwork for future growth. In the next 12 months, we will implement the program that has been initiated to reduce administrative expenses and thus to significantly increase our competitiveness. The goal is to achieve cost leadership in all areas. We will position the Industrial business segment to make it more customer- focused and we will keep Building and Facility on a growth path, includ- ing through selected acquisitions.
Overall, we intend to expand our business once again in the me- dium to long term. Following the repositioning of the Industrial business segment, we will actively participate in the consolidation of the market. Furthermore, we will drive growth in our defined core markets. Our goal is to continually improve our business processes in order to generate long-term profitable growth.
The status of the implementation of our strategic goals is shown in the graphic ‘Key points of mid-term corporate development’.
Industrial:
Restructuring continued Focus on optimization of operating processes and sales structures
Building and Facility:
Continued profitable growth
Additional growth initiatives
in both segments defined and implemented
2016
Transition year
2015
Foundations laid for future growth
Continued improvement of business processes Return to profitable growth
Medium and long-term
Expand business
Program to reduce administrative costs Target cost leadership
Industrial:
Develop a customer-focused business model
Building and Facility:
Selective acquisitions
Geographical expansion
in our defined core markets Continue
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Our key financial management metrics include figures for growth, prof- itability, capital efficiency as well as our capital structure. The most important of these are output volume, EBITA adjusted, free cash flow from operating activities and return on capital employed.
Growth and volume In addition to the Group’s revenue, the figure for
output volume also includes our proportion of the goods and services supplied by joint ventures and consortiums. Their planning is conducted on the basis of orders received and order backlog. Profitable organic growth in output volume forms a cornerstone of our strategy for increas- ing Bilfinger’s enterprise value. In addition, targeted acquisitions will contribute to the growth in output volume.
Profitability
EBITA / EBITA adjusted and return on EBITA The indicator of
operating profit of the corporate units and of the Group, and thus the measure of earnings for segment reporting, is earnings before interest, taxes and amortization of intangible assets from acquisitions (EBITA). When performing such an analysis, the focus is on the profit margin – calculated as operating profit as a percentage of output volume.
We are focusing here on ‘adjusted EBITA’ with adjustments made for special items. For better comparability of operating performance over time, special effects with a one-time, temporary character are eliminated. These include, for example, gains on disposals, restructuring measures as well as one-time expenses in connection with the further development of our compliance system and the conclusion of old cases.
Net profit / dividend policy Net profit consists of operating profit
plus / minus amortization of intangible assets, financial income and ex- pense and taxes. Also with regard to net profit we make reference to an ‘adjusted net profit’ with adjustments made for the above-mentioned special items as well as for amortization of intangible assets.
We generally pursue a sustainable dividend policy with the objec- tive of allowing our shareholders to participate appropriately in the Group’s success. With regard to the dividend, we generally intend to pay out to shareholders approximately 50 percent of net profit, depend- ing on the development of earnings and liquidity.
Capital efficiency
Value added and ROCE A further management system in the Bilfinger
Group is the so-called value and cash-oriented management. With it, it is possible to measure the value added by our business segments and by the Group as a whole. We employ our capital in a targeted manner in order to achieve high value added. The main idea behind this concept
return on the average capital employed is higher than the weighted av- erage cost of capital (WACC).
The parameters upon which this calculation is based are deter- mined as long-term average values, are regularly reviewed, and are adjusted for any relevant changes in the market environment. The cal- culation of the value added achieved by the business segments and by the Group is presented in the chapter on value-oriented management with appropriate explanations.
Free cash flow from operating activities / cash conversion / net working capital For the operationalization of value-oriented manage-
ment, we also orient ourselves toward the so-called free cash flow from operating activities and the cash conversion for each business segment. A major factor to be considered in this regard is the change in net work- ing capital. Net working capital is calculated as the difference between current assets excluding cash and cash equivalents and current liabili- ties excluding financial debt. A reduction in net working capital leads to lower capital employed and thus also contributes to an increase in the return on capital employed (ROCE) and in the value added by the busi- ness segment concerned.
Free cash flow from operating activities is calculated from the cash flow from operating activities minus net investment in property, plant and equipment. We calculate cash conversion as a quotient from the net of EBITA plus depreciation minus net investments in property, plant and equipment as well as the change in net working capital and EBITA.
Investments Although compared with some industries our business
is not very capital intensive, planned additions to property, plant and equipment are subject to intensive investment controlling. The planned investment ratio in relation to output volume is approximately 1.5 to 2 percent.
Capital structure and liquidity
Net debt and dynamic debt-equity ratio To manage liquidity, we
focus on two important key figures: net debt and the dynamic debt ratio, which also includes net debt as relates to EBITDA. In both cases, we also consider – as in the framework of operating profit measure- ment – an adjusted dynamic debt-equity ratio for which we eliminate special and one-time effects.
Further key figures On the basis of our strategic corporate planning,
we regularly review the effects on our financial risk profile of various scenarios for the business and financial development of the Group. In addition to those mentioned above, key figures include so-called gear- ing as well as cash-flow protection.